All outsourcing relationships are not alike. Just because two companies have agreed on a transfer of services doesn't mean they're functioning as true partners - or that they'll stick together for the long term.

Business conditions are constantly changing. An outsourcing deal that made sense at the time it was signed could lose its relevancy over the years. So it was with Dell Inc. and GENCO.

The companies had a good history together. GENCO began expediting Dell's returns and repairs in 2005. Four years later, Dell turned over its entire North American remanufacturing operations to GENCO. The deal covered testing, remanufacturing, repair and refurbishment of desktops, notebooks, servers and storage systems, all out of a 298,000-square-foot facility in Lebanon, Tenn.

The contract was set to run for three years, a long time by Dell's procurement policy standards back in 2009. The deal was transaction-based, setting a "price per activity," while requiring GENCO to uphold strict service levels.

Toward the end, the relationship began to fray, as Dell placed increasing pressure on GENCO to reduce costs without compromising on service. Even then, Dell wasn't satisfied with the vendor's commitment to cost reduction. The putative partners reached a moment of decision: either scrap the relationship, or try a new approach.

What they came up with was the concept of "vested" outsourcing. The word describes a partnership in which both sides share in the risk and reward. It required a much tighter linkage than was present in the previous deal between Dell and GENCO.

Several events triggered the decision, most notably a chance for Dell to work with experts at the University of Tennessee, especially supply-chain consultant and educator Kate Vitasek, who pioneered the notion of vested outsourcing. "She brought us a pretty far-reaching concept," says Robert McIntosh, Dell's executive director of global reverse manufacturing for the Americas. 

Dell Had Doubts

At the outset, Dell doubted its ability to embrace the idea. The company had been wedded to a model that was sharply focused on the price of services.

"I wasn't quite sure we were going to be able to do it," says McIntosh. Nevertheless, Dell and GENCO embarked on an 18-month effort to learn just how vested outsourcing worked.

McIntosh was understandably nervous. Having spent six years in Dell's procurement organization, he wasn't sure that the parties could reach the necessary level of trust in one another.

"I probably wasn't the first one to stand in line for the change that we had to undergo," he says. "But as I learned more, I knew who we were dealing with on the other side of the table. It made the commercial transaction go a lot easier."

Guiding the journey were the "five rules" of vested outsourcing relationships:

• Focus on outcomes, not transactions,
• Focus on the what, not the how;
• Agree on clearly defined and measurable outcomes;
• Optimize pricing model incentives for cost-service tradeoffs, and
• Build a governance structure that creates insight, not just oversight. 

There were specific goals to be met as well. Following its scrutinizing of the vested concept, and the reading of many case studies about prior successes, Dell focused on three main areas: quality, customer experience and cost.

To kick things off, Dell and GENCO looked for ideas that would fuel an entrepreneurial spirit - dubbed "Ponies," in vested-outsourcing parlance. Key questions included how much money the partners could save by working together, and how they could boost overall efficiency.

McIntosh says Dell brought in participants from all parts of the organization: supply chain, legal, finance, corporate. So, too, did GENCO. "They basically matched us peer for peer, as we went through this journey together to get comfortable with the change that we were about to undergo," he says. 

Out With the SLAs

The old contract was burdened by dozens of service-level agreements (SLAs) that didn't reflect the new way of thinking. At least 30 of them were discarded, leaving the companies with half a dozen key performance indicators (KPIs) that directly impacted on the goals laid out from the start.

Next came development of a joint pricing model that would benefit and reward both parties, assuming they met the desired outcomes. Out went the "price-per-activity" approach, in favor of one that tracked loss per box and the overall profitability of both companies.

Today, says McIntosh, "the contract's probably a little thinner, but both of us are more invested in making sure the relationship works, not just for us but also for our customers."

All of that was prelude to the eventual signing of a new contract. Guiding the parties in that effort was a "requirements road map." It's designed to answer a number of key questions, including who's responsible for the data underlying the chosen metrics, where it's coming from, how often it's collected and how the metrics are calculated. Dell refers to this document as "the heart of the contract."

Even the most carefully planned relationship can fall apart if the parties don't establish a structure for ongoing governance and oversight. Dell and GENCO assigned individuals at multiple levels of management, from the executive suite to the front lines, to monitor performance and keep both organizations informed. They meet weekly, monthly and quarterly, with the last generating detailed status reports for upper management. At the same time, they work to identify opportunities for future improvement.

The results are evident. Dell and GENCO claimed "multi-million dollars" in benefits after just two quarters of the vested arrangement. Dell's customer satisfaction reached an all-time high, cost per box was reduced by 32 percent, and scrap was cut by 62 percent. GENCO, meanwhile, having shed the yoke of price per activity, has seen a tripling of profit margins resulting from improvements in Dell's reverse-logistics processes, according to the companies.

"It sounds almost like a fairy tale," says McIntosh, "but what it really shows is that when we partnered together and focused on what the end-customer wanted "¦ we were able to achieve some goals and results that were above our expectations."

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Keywords: supply chain, supply chain management, supply chain planning, inventory control, inventory management, vested outsourcing, retail supply chain, sourcing solutions